BAE Systems is looking at a tie-up with defence contractor General Dynamics as it searches for a US merger partner, it is reported.

The Farnborough-based aerospace company is considering either a full merger with the US company, or looking at it as a buyer for its shipbuilding arm as part of a deal to merge with Boeing, according to the Sunday Times newspaper.

BAE refused to comment on the report, but a spokesman told the paper the company held talks on a regular basis with major players in the defence industry.

If BAE could find a buyer for its shipbuilding business, it would help make it a more attractive merger partner for Boeing, which has already said it would have no interest in the shipyards if the two companies tied up.

French deal snubbed

BAE Chief Executive Mike Turner denied the reports.

Speaking at the Paris Air Show, he said BAE had been in close contact with General Dynamics about its Astute nuclear attack submarine after the programme ran into major cost overruns and had seconded a dozen of its engineering managers to help with the contract.

Shares in BAE Systems rose last week after it said it had rejected an informal approach from French-owned defence firm Thales.

However, Thales later denied it had suggested a merger.

Earlier in the week, newspapers reported BAE was looking to merge with one of its US rivals, Boeing or Lockheed Martin.

Cross-border defence sector mergers are complicated by restrictions on foreign ownership of defence firms. The UK government has imposed a 15% limit on the size of individual foreign stakes in BAE.

And a tie-up between BAE and Boeing could force the British firm to dispose of its 20% stake in Boeing's European arch-rival, Airbus.